which has a year-long series of seminars on the ethics of wealth. there are other parts of that series you may find interesting. this may be of interest to you going forward throughout the year. before we get started, i want to say a few logistical things. greg is doing an event at the bookstore at 6:00 p.m., if you have detailed conversations you want to have, that might be the appropriate for them. secondly, this is being recorded by c-span, so this is forced future broadcast, just so know if you are asking a question, you may wind up on television. because of that, we have

microphones for q&a, so he will talk for about a half an hour and then do some q&a. if you have questions, head to a microphone and he will call on you. greg came to stanford from south africa in the late 1990's, he graduated from here in the class of 2001 and immediately went to work for goldman sachs. as you probably know from reading the "new york times" he left in a high-profile way that a lot of people argued about. in some sense, the point he was making was that old man used to be a greedy type of firm in trying to build its long-run profitability by serving clients interest. his argument was that had changed. something in the operation of goldman said at people were more focused on their arsenal success and the success of their subunit. this is a topic that was very

controversial here. i hope that we can have an interesting dialogue between greg and people in the audience. you probably have all sorts of different views. welcome back to stanford and we look forward to hearing what you have to say. >> [applause] thank you very much. can everyone hear me ok? is that a yes? it is a great privilege for me to be back here. like you said, the first time i ever came to america was the day i arrived at stanford. i associate stanford with a lot of great things, a lot of idealism and optimism and it is great to see a lot of familiar

faces. there are three or four people here for my freshman dorm which is terrific. i was sitting where you were about 15 years ago, although the business school did not look like a hotel back then. it looked a little bit less fancy. a few things i will tell you about myself before i start. one is, i am from south africa. i have a slightly funny accent because i lived in california for four years and new york for 10 years, london for a year and a half. people ask where i am from, i often tell them i am from brooklyn just to confuse them. when they get quite confused, i say, yeah, east brooklyn. that confused them even more. i hope everyone can understand may. i used to have a ponytail, which is also hard to imagine. a third fact about me, i started at stanford as premed. i started the economics and

premed track at the same time. ultimately, i decide to go into the business world. taketo get a sense, can i a quick poll -- who are undergrads in the audience? and business school students? and members of the community? faculty? great. we have an excellent and diverse audience. you will have a good dialogue, onmagine people are split these issues. --ouple things i will say the professor mentioned the op- ed i wrote about goldman sachs. everything i said i very much believe is true to the industry. i do not think -- goldman is a smart firm and excellent firm at what it does. are not think it practices very different to the industry

more broadly. when i wrote the book and the op-ed, i was using my career there as a view of what i think has become conflicted in the industry. the second thing i would say, i think a lot of people would would want to classify my views or this talk as in the occupy wall street camp or a different type of camp. i would say, i am very much a capitalist. freet have the view that markets imply that the playing field is fair and there aren't a lot of conflicts of interest. a big thesis of my book and what i was trying to get across in the op-ed is the fact that capitalism, at least in the financial industry, i no longer think is on an even playing field. the op-ed is the fact that capitalism, at least in the financial industry, i no longer think is on an even playing field. i think advantages are stacked

in favor of banks and against their clients. i will get to this more later on. let me tell you the three things i will discuss today. the first is, has anything really changed in the industry? certainly when i wrote the op-ed, a lot of people said, things have always been this way. or, wall street has always operated in a certain sense. i will tell you how, at least since i was sitting where you were 15 years ago, in my opinion, things have changed. the second thing i will tell you is, with all these changes, how do banks exploit conflicts of interest to make money in a way that i view as unfair at best and potentially very systemically dangerous to ociety at worst? then, what needs to change in

order to fix this and why hasn't enough changed? on that point, i would ask, how many people in this room have heard of the dodd-frank act? how many people think the dodd-frank act has been implemented? 2.5 years since dodd-frank was passed, less than one third of it has been implemented and more than three quarters of the eadlines have been missed. millions of dollars were spent lobbying against it. perception that conditions have changed -- i want to show you guys why they have not changed. why obama or romney or any number of politicians would want people to think. starting with the point of what has changed, i think there have

always been practices on wall street that are not great and are dubious. the simplest way to mark what has changed is look how banks make their money. and i joined the firm in 2000, when i joined wall street, at least half the money was being made in the original things that made finance get called finance. wall street finance, things that help companies raise money. they acted as an advisor in many apacities. when i joined, about 60% of goldman sachs also revenue within the banking side of the business. there will always be conflicts, but there aren't less complex than in the trading side of the business. fast forward to 2007, close to 80% of the money is being made in the trading business, which is a very marked change.

i do not think people can debate that as being non-factual. with that kind of revenue change does is leads to behavioral and ultural changes. what occur that allowed this revenue shift to change? three main things occurred around the time when i was joining wall street. the first thing, in 1999 there was a thing called the glass-steagall act separated commercial banks from investment banks. it was repealed. in 2000, there was a thing called the commodity futures modernization act which essentially took complex securities called derivatives and deregulated them. it allowed the trading of derivatives to move off exchanges and basically into the dark. the third thing was, a thing called the net capital rule was overturned. hat that did was allowed

banks to increase their leverage - if you have $1 you can effectively lev it up by taking bets 10, 20, 30 times the amount by borrowing extra money. from the early 2000's to the mid 2000's, banks took leverage from five to one up to 35 to one. with these three things, which were all regulatory in nature and all lobbied for by the banking industry, it became very clear that as a professor said, the old model of long-term greed, which was the motto goldman sachs had for many years, which essentially said if we do right by clients over the long term and maybe turn away business in the short term which can affect our reputation, they will keep coming back to us.

we will have a collaborative relationship with the client as a partner and they keep paying us and keep doing business with us because they trust us. this shifted to a model i would call short-term greedy, which ultimately makes more profits for individuals and for the firm in a short-term but in a long-run standpoint does not serve your business well and does not serve the society well. because potentially you are doing business that is toxic to your clients and ultimately endangers the system, as we saw in 2008 where merrill lynch, aig, they had taken such huge risks that it ultimately brought the whole system down and the government had to come in and bail the system out. so we talk about all these regulations occurring -- what basically happens is it becomes clear it is more advantageous for the bank to start betting with their own money.

when you can take levered bets of 30-1 you may start seeing a client more as an information provider to help you bet more smartly as opposed to seeing your client as a partner you help to make returns on their money. in the early to mid part of my career i saw this cultural shift occur. the firm started seeing what the biggest mutual funds and pension funds in the world were doing and started implementing their wn bets using this information in a way that was not insider trading technically but allowed banks to use this big picture sitting in the middle position o bet. goldman sachs trading revenues in 2002 were $5 billion. i 2007 it was $38 billion. it is -- businesses do not multiply by five or six times in five or six years unless there

is some meaningful shift in the mindset. ultimately that leads to a what i would call a behavioral shift. it does not happen overnight. if people are being incentivized to use my information to better the firm's own money and nobody is telling them there is anything wrong with that, it filters up and down an organization. this shift occurred everywhere on wall street during that period. a few examples to show this mindset shift, in the last year or so, countdown what i call the scandals that show this kind of swing from the fences behavior. you had mf global, a futures brokerage in chicago, where the head of the firm started making proprietary bets on the sovereign crisis in europe and

alternately the firm went bankrupt. there was a scandalous situation where they were potentially using customer money to fund these bad bets. secondly, in the last few months we all heard about the libor rating scandal. libor is an interest rate that affects hundreds of trillions of dollars in assets throughout the world. this is, i would say, a example of this, where traders were collaborating with each other to set an interest rate because they knew they would make more money for the firm. look at the facebook ipo -- we can argue endlessly what is facebook's fault or morgan stanley's fault, the investors fault, but certainly a manifestation of this let's swing for the fences and try to get as much out of this deal as possible. let me go on to point two, to explain how banks make this money using an analogy i used in

my books. if you compare wall street today, 75% of revenues come from trading, to a real casino. not everybody likes gambling, but whether we like gambling or do not, when you walk into a casino you can have a lot of faith that the rules are not going to change during the game and that there are cameras all over the floor and that there is a regulatory body that for the most part is keeping an eye on things. the other thing i would say is the casino, the house is not allowed to take bets based on what everybody in the casino is doing. it is what i call an objective counterparty. let's run through this analogy a little bit. if you think about an investment bank, they are not dealing everyone cards. let's say at the table is a pension fund, a hedge fund, a

mutual fund, hundreds of billions of dollars sitting at the table. that bank, or the dealer, can see what all those people are doing and can then go out and use that information to place their own bets. you would expect someone not to lose very often if you could see everyone's cards. this is very much borne out in an example we see every quarter where banks have to release their results on the trading books for the whole quarter. there are many quarters where a bank will literally make a profit 100% of the time. hat is like batting 1.000. i am sure most people in this room invest in the market. if you make money 50.1% of the time you are probably outperforming any people in the arket. it is very hard to understand

how trading books can make money 100% of the time unless you have some kind of asymmetric information advantage. that is where i would come back to the analogy of you are seeing what everybody else is doing, so you can bet a lot smarter with your own money. the second part of the analogy, i mentioned the cameras. what happened with the deregulation of derivatives is gambling can be taken to a back room where there are no cameras and no one is tracking who is losing a lot of money and making a lot of money. this is the example of lehman brothers and bear stearns and merrill lynch, where no one knew how much risk they had on their books. it turns out they had all sorts of risk and nobody in the market knew or understood them. this is the big danger of business being done in an opaque fashion, in the dark, in a very complex nature. i would argue that ultimately you need to bring began pulling out of the dark room and bring it back into the light. in exchange, where everyone can ee what is going on.

to continue a little with the analogy. this is what i think is the most dangerous part of the way business is done on wall street today. the dealer. when you are playing blackjack, i think everyone knows the rules. if you get more than 21 you are bust. there are certain statistical probabilities you should and should not bet on. when you go to a casino, does anyone in the audience expect the dealer to give them bad information? for example, where the dealer is actually telling you when you are on 19 that you should take another card? o one would expect, at least when i have been to casinos, -- the dealer is kind of on your side and somewhat friendly and will tell you. you often see people who never gambled before who will take another card of 19 and ruin everyone else's hand.

the dealer would like to tell ou this is a bad idea. i think you have what i would call an implicit sense of trust, we do not expect the dealer to misguide you. what sometimes happens on wall street is a client or investor will get told to do something that if they understood the ules of the road very well would know is not in their interest to do. yet a wall street firm will tell them you should do this because they're firm might make 15 million or $20 million off of this. they are not technically doing anything illegal. that person walked into the casino. they are responsible for their own actions. i think this is where a big misunderstanding comes from. many of you remember, in 2010 there was a big sec lawsuit against goldman sachs.

there was a big hearing in front of carl levin where a lot of swear words -- one particular word was used over 20 times because of how bankers spoke about these deals. the big argument for why it was ok to sell someone something without full disclosure or without telling them your intention was this idea that everyone is a big boy. if they come to play they deserve what is coming to them. even if there is a sense of deception or a sense of misleading them. now, i think a lot about the words fiduciary duty. this is a word thrown around a lot. but the essential meaning of it is that when someone is coming to you for advice, if you are bound by a fiduciary obligation you owe that clients, that person, the duty of telling them

what is in their interest in what is not in their nterest. over the time i was at wall street, it has turned into the sense that a fiduciary duty is not owed to anyone. the big problem with that is i would argue many clients with hundreds of billions of dollars of assets to not understand that. i will give you two examples that ultimately led to me writing the op ed. i would like all of you to think about this as an ethical dilemma, especially since we live in a time today where the idea of ethics versus legality are very different things. it if something is technically legal and will not get you sent to jail, a lot of people will do hat thing. an example, we recently had a terrible storm, hurricane sandy. everybody gave donations to the red cross society or any number of charities. i think what the general public

does not know is that red cross, every university, stanford, harvard, teachers pension funds, governments, are the biggest fish in the market. they have hundreds of billions of dollars of assets and are what i would ask is, as a hypothetical example, if the red cross society came to you and asked to trade a very competition derivative product that was going to pay the firm $20 million yet you knew it was not in their interest, but it would not necessarily get you sent to jail because the government classified it as sophisticated. would you do that business? more and more i saw the attitude and behavior moved to a point where yes, we will do that business because they are a big boy. i would argue it has reached a point where because of the asymmetric information i told you about not everybody is on an

even playing field. i think more needs to be done to prevent that kind of behavior. the second example i would give you is a very powerful one. for helping me make my decision. the european sovereign crisis, which is still boiling but we may remember last summer or the summer of 2011 when it looks like portugal, spain, italy were teetering on bankruptcy. i would go to trading meetings every morning and our traders would have a very negative view on the european banks, yet we were being asked to go to some of the biggest investors in the world and try to convince them why the european banks were such an attractive investment, purely because we did not like the investment and wanted to sell the banks but we needed somebody else on the side of the trade to buy the banks. if we were just talking about some arcane investment that did not affect anyone this might not

be so relevant. but i would go to my desk and i would see the biggest banks in france and all over europe moving up and down five percent- 10% a day. largely driven by this idea that every two days to drum up business clients at banks across wall street would be convinced that today's the day to sell, tomorrow you should buy, now is the time to panic. the truth is, traders across wall street did not really believe conditions were changing on the ground every day. to me this started having real world impact. millions of citizens across europe are affected by the fact that their governments cannot get their act together and banks are trying to drum up business in order to make their profits at the end of the quarter. this ultimately became something that i thought crossed the line of the letter of the law versus the spirit of the law. ethical versus legal. it got to a point where i felt

this was not the type of business i wanted to do anymore. the final point i will talk about before i take some questions and answers will be what needs to change in order to fix the system in my opinion. one thing i would say, which i do not expect a lot of people know, is that the five biggest banks in america are now bigger than they were before the financial crisis. whatever people claim or do not claim, banks still have an input said, and i would argue almost exclusive, guarantee that government will support them. just to explain a little bit, there was an example last summer where a jpmorgan trader who was nicknamed the giant whale or the london whale basically took a massive debt, lost $6 billion

for the firm, got a wrist slap, lost his job. the person who ran the group over the course of her career made more than $50 million, and left the job. if that loss had been $200 billion instead of $6 billion the thing that happened to the person who took the trade would be exactly the same. they would get a wrist slap, leave the bank, and a society would have to bailout the bank because of this existing implicit and explicit guarantee. anybody who talks about free- market capitalism, we saw in 2008 when faced with the idea of are you really going to let the banks fail, the truth is the government was not willing to take the risk and see what happened. everyone on wall street knows that. there is now incentive to swing for the fences and do whatever

you can to maximize profits because of the trade goes bad you will just lose your job. everyone has to bail the banks out. i think what this amounts to today is what i call a privatization of profit and a socialization of downside risk. that is still in force today. anybody who claims it is not in a force is not, in my mind, telling the truth. why is not enough done to fix this? i would -- at the end of the book i point the finger back at politicians. the truth is that i think the thing we should all be most outraged about is, look at the senate banking committee, who are the firms that are giving them the greatest campaign contributions? goldman sachs, jp morgan, morgan stanley -- look at the regulators. the hundreds of millions of dollars lobbying in order to kill regulation.

this is very counterintuitive to me. a way to kill legislation in today's day and age is not to get rid of it or to get it struck from the act. it is to fatten it up. this was not obvious to me at first. a thing called the volcker rule, designed to completely eliminate proprietary trading, banks betting with their own money. it started out as a two-page document written by two senators as an amendment to dodd frank. two years later there was something like 700 pages. banks realize that if they can get the law firms to exert hundreds of loopholes and amendments you ultimately reach a point where the law is so complicated that nobody can actually -- you have achieved a victory were nothing has changed at the end of the day. we need to say the politicians, number one, why do you not have the political will to actually

fix a problem that affects everyone? banks can still be profitable, can still do things that serve economic prosperity, raising money, helping companies merge, but when 80% of bank profits are coming from trading i do not think of banks or are being honest with the public with how their money is being raised. look at commercials and tv for citigroup goldman sachs or jpmorgan. you would think they are in the business of helping new orleans rebuild or giving money to charities. certainly there is a significant amount of philanthropy on wall street. but i would say to you that the amounts of money made by investing in urban communities is less than 10%. i think there needs to be a greater sense of honesty, where people are upfront and say 80% of the money is being made in a business that the public does

not understand, frankly politicians do not fully understand, and i would say to you regulators are not resourced enough or nimble enough to understand things because they are so complex. so what i am advocating for is a return to the old long-term model where you do business, you make money, the clients make returns, banks can still be profitable. and people who do things that risk the systemic safety of the economy are held accountable. the way to do that, and i'm not a huge fan of regulation, but i think the three big things you need to do. one is derivatives. you need to bring them back the light. you need to bring them onto exchanges. proprietary trading, through the volcker rule, you need to out live. the law does not have to be 700 pages. it can be one page. a lot of times banks will hide behind market making or hedging, which is a more competent

discussion. what i would tell you is it is a way to hide behind something that will let you continue to do proprietary trading. the third one, which i'm interested to hear what people in the audience think, is about our bank still too big to fail and are they too big and too complex to manage? i would say they definitely are. i would say there is critical mass building where you do not want to be destructive of the banks but when they are still so systemically dangerous is there merit to making them smaller? spin off the trading business from the retail side? i would argue that yes, there is merit to that. with those three things, i will leave it there. thanks for listening. i will open it up for questions. [applause] >> first come first serve?

go ahead. >> thank you for speaking. it seems like a lot about what you are talking about was a policy analysis of what the situation is on wall street today. but there are a lot of us in the audience who are interested in taking those issues the way you described it from a personal perspective, if we were in your shoes, what is our duty and what is the best way to effect change? one thing that i noticed was since you wrote the op-ed and attracted a massive amount of media attention, a lot of that momentum seems to have died down over time. there does not seem to be the same degree of scrutiny over goldman or wall street generally. it made me wonder, maybe part of it is because publicly publicizing your reason for leaving goldman sachs, even potentially sympathetic employees at goldman think there is some pressure to defend the integrity of the firm because

they are attacked from the outside. perhaps you faced more resistance than you would've had you taken this internally. i'm wondering, given the information you know today, if you had to do it all over again would you think it would have made more sense to have the same content of the op-ed but not take it to the "new york times" but e-mail it to every employee in the goldman sachs worldwide directory? >> that is a great question. there is a way to send something to everyone in the global directory, which everyone fantasized about at some point. if you have mistakenly sent an e-mail to everyone. what i would say to you is it took me -- in the book, i say i wrote the op-ed over four months. i went through a process of having dozens of conversations, first with the people sitting around me. behind closed doors, a lot of people on wall street feel a sense of angst about the sense that the game could end any day.

i think everyone, 95% of wall street, are fundamentally decent people. but i think they're being asked to do things that, as i have been talking about, step over the line of what i think is ethical at times. what i would say to you -- i do not think goldman sachs is the problem. i think this is a systemic problem. i know the professor was saying there is a real temptation to think that if we send two or three bad eggs to jail the problem will be fixed. the point i tried to get across in my book is that this is not a problem about a few bad people making bad ethical decisions. this is about a whole system that does not just encourage people to make these decisions, but incentivizes them. their bonus will be directly determined by how much they bring in. i've had conversations to check

with people who felt similar. i also had conversations with goldman partners behind closed doors, half of whom agreed with me about these ethical lapses and long for a time about returning to this long-term agreement tally. it gets to a point where it is the golden goose -- as long as it is paying people money, there's not a lot of incentive to pull the curtain back and actually change the system. what i would say to you is that there are a lot of people in difficult situations. not just relative to the world, but people who have kids going to private school, all sorts of bills. living an expensive life. by sending a letter to people internally i could very quickly see through my conversations with people, including a couple in the management committee. by the way, i think this applies to any firm.

there is not a lot of incentive to change something. if you are doing something and are not going to jail are going to trouble for it, in my opinion by talking to people about it internally you will not have an impact. i think this problem is as big as politicians and regulators not understanding the broader problem. alternately i decided i was going to leave. i did not think there would be merit in trying to say something publicly -- i did think there would be merit in trying to say something publicly, not to destroy profitability on wall street but may be restored to a more stable fashion. giving you an example for the business school students. look at, is a short-term greediness actually good for goldman sachs's business or jpmorgan's business? i would say i do not think it is good for the business. look at how the stock market values banking stocks. banking stocks are valued at below value. even the markets does not like this model where there is no

predict ability, no sustainability, no long-term orientation. look at jpmorgan's earnings statement. there is zero disclosure of how the money is made and where it is made from. investors cannot value companies correctly. i just thought there would be something to be said for saying something publicly. i think the people from within the industry do not say something -- nothing will change. we will go through a cycle where every seven or eight years we have bubbles that expand and ultimately burst. let's hope it does not happen again. >> that is pretty discouraging. you bring out a really good point that the process of regulation seems to be kind of hopeless. big money will defeated over time by boring from within. who watches the watchmen? is that an ethical thing we have

to have, to change the structure? how do you see the move from these great investment houses moving from a partnership to a corporation, and do you see a correlation of that, the emphasis on a fiduciary relationship versus a counterparty relationship. do you see that? >> i see that as being a huge contributor to the problem. goldman sachs was the last large private firm on wall street. when you are a private partnership your partners? incentives are much more aligned with clients. if you do a deal with the government of libya and it ruins your reputation and people pull money from your firm, you will feel immediate pain because your capital is tied up. when these firms became public it became much harder to take ownership of the problem. i do think that it is an issue. it is hard to go back in time

and privatized firms, but when they were private incentives were aligned. i think client interest was better served and banks were less dangerous because they were less big. the reason banks became public is because of this move in the late 1990s to create what i call these banking supermarkets like citigroup. in order to compete every investment bank had to get bigger by getting public funding. if we could go back in time and reverse glass-steagall being repealed, reverse the derivatives being deregulated, reverse the leverage issues, in my opinion i do not think we would have had this scandal as bad. the financial crisis could have still occurred, but i do not think it would have occurred on the same scale. alternately i think the way you fix it now is point the finger at politicians and regulators and say, we elected you to understand what is going on.

if the system is too complex to understand you need to make the system less complex. if you are being corrupted or unable to be objective because people are giving you money and lobbying and funding your campaigns, the a left rate needs to vote those people out of office and say, this senator is no longer objective. this regulator running the sec no longer understands what is going on. i have said the public is not more tuned into this issue. my biggest goal in the book was really to write this book not for a wall street audience or anyone who knows anything about finance, but to write it for people who know nothing about finance. to pull the curtain back to show. there are a lot of good things going on wall street, but a lot of conflicts of interest. only if the public holds politicians feet to the fire will things change. my hope -- an earlier question was how can business school students and college students

change things. one thing, speak to politicians, hold them accountable. fill yourself in on issues. when you do work in finance, act within your own ethical compass. one by one people can change things. but i do think politicians ultimately probably harbor the largest amount of blame in this. >> this was a great segue to my question. what are your plans for the future as far as her career? i think you would be great in congress are working for the sec or the department of justice with your background in values. i'm sure there are people in this room who would support you. >> thank you. i told some people i am becoming a dj, which is not a very popular thing, as a joke. in the short term my plan is to try to bring awareness to i would say the motion or term crisis, the fact that dodd frank is dying what i call a very slow death by a thousand cuts. i am sure everyone tuned into

the presidential election. not one candidate talks about financial reform. does not matter if you are democratic or republican. there is literally one person running for senate to even mention it, who is a elizabeth warren. we can agree or disagree about whether her views are accurate or not, but what i do commend her for is that she is talking about it. if it affects people's lives, politicians should talk about it. i want to give talks like this to give a little bit of awareness to what i think is a serious problem. longer term, i would like to be helpful to congress and to the sec. i have been in touch with people in congress, and i hope to be helpful to them. in terms of my longer term plans, have not figured it out yet. a lot of people said, you have burned your bridges on wall street, you will never work

there again. but i think the point i make to people is that that is not what i hear from the public in terms of this idea of returning to fiduciary standards. the big players in the market are not hedge funds. hedge funds -- those investors account for five percent. the big players are teachers pension pants and sovereign wealth funds and mutual funds to hold 401(k)'s and donations and retirement savings. i would like to be part of the solution in terms of bringing a greater fiduciary standard back to markets. >> earlier in your talk you mentioned merrill lynch and lehman brothers and bear stearns as being three firms that were overleveraged and operating in the dark. and they kind of disappeared. could you give us your thoughts on why lehman was allowed to

burn up and the other two were rescued? >> it is a very controversial topic, which i think conspiracy theorists will talk about for a long time. but i was sitting on the trading floor when that happened. when lehman brothers was allowed to fail, any record checkers or fact checkers should go back and look at the editorials the following day. liberal periodicals and conservative periodicals praised hank paulson for drawing a line in the sand and saying, you know what, if you take irresponsible risk in your leaders are not willing to fix the problem or show the right amount of transparency, you are going to be allowed to die. ultimately when the government reversed course on aig and molto other things i think it showed a

tremendous amount of uncertainty in the market area everyone panicked, and it led to more problems. looking back on that, i think there was a mismanagement in that what markets like, anyone who invests in stocks will no markets like consistency. they like to be able to see what will happen in the future. the fact that every day was a guessing game of who will be allowed to live and die was a very dangerous thing. i think perhaps everyone should have been saved or everyone should have been allowed to die. i think everyone would have been scared to see what happened. that is an extreme view. but ultimately i think history will look back on it and the crisis probably would have been worse if -- i say it is hard to say. you need a crystal ball in order to tell. >> first of all, thank you for speaking out on wall street. a lot of paychecks are dependent on not speaking out. i wanted to thank you for that. there is precedent for prosecuting people for

securities fraud, like in the 1980s during the savings and loan scandal. i wanted your thoughts about how or why there have been zero criminal prosecutions of any wall street executives. >> an excellent question. i think the question everyone in america asks. the reason is quite simple. the laws are not, i would say, on the level that allows criminal prosecutions to take place very easily. this is what wall street wants. right now you need to prove criminal intent to defraud people. look at any number of examples, the mf global example, a particularly egregious one where jon, the former head of goldman, a former governor of new jersey, essentially $1 billion of money disappeared. the reason they will tell the

public that nobody went to jail or was prosecuted is because in order to prove intent that they were trying to defraud people, it is a very hard thing to do. i would argue -- as i said, i would not classify myself as a pro-regulation person, but any thinking person realizes that if everyone is driving race cars and there are zero speed limits and everyone is just mandated to self regulate and not crashing the people, alternately you will get bad actors to crash into other people. i think the laws need to be more strict. the hope was that the momentum coming out of the crisis would be used to change those laws, but unfortunately things are fading into memory. frankly, that is what banks want. they want us to receive into memory. personally i thought the

jpmorgan example was something that should have been a much bigger deal. it was very symptomatic of this reckless, we gamble and if we win we keep the profits and if we lose we do not have to worry about it. it was an opportunity for congress to change things. someone speaking at the business will next week has done great work prosecuting insider trading. go for the low hanging fruit. it is easy to prove a billionaire used misinformation in order to make some money for himself or herself. the truth is that insider trading does not actually affect that many people. the real issue in my mind that the justice department and lawmakers should be going after is the systemic issue of, i mentioned earlier the proprietary trading. i would tell you it is absolutely going on. it is just going on under what i call a new term, hedging or market making. we are doing this. the truth is in my mind much

less is being done in the service of clients. much more is being done by using the fact of serving clients to make yourself money and place your own bets. i think congress needs to become a lot smarter fixing the rules. if they can fix that rule i think it will be more valuable than sending people to jail. the great danger of that is then everybody says we have fixed the problem. the real problem is much greater and much more systemic in my mind. >> you mentioned mutual funds are among the major players in the market. do these systemic factors that you mentioned have a significant impact on what i will call mainstream mutual funds that invest in equities or fixed income as opposed to the fringe players? should we as individual investors have concerns? >> absolutely. i will give you a couple examples. may 2010, there was a thing called the flash crash where the

market literally dropped 12% in one second. nobody could explain what happened. people who researched the issue speak about a thing called high frequency trading, which wall street firms have computers that they get to the stock a millisecond before anybody else. this creates a lot of volatility. i would argue that mutual funds, no matter how vanilla, are still investing in stocks. if the market cannot be assumed to be fair and without uneven advantages, i do think people should be concerned. i do think mutual funds should also be held accountable not to use products like derivatives when they do not fully understand them. a lot of the time they don't. >> thank you very much. >> i have a question that is related to some of the answers you have provided. i think all of your responses have talked about regulations

that are instituted and also talked about incentives and perhaps disincentives for some of the behavior that he this. i would like to understand, given the complexity of enforcing regulations and what you have advised the audiences and future generation of financiers in wall street -- what would you recommend on the business side aside from the legal consequences of violating regulations, something that relates to the financial rewards? in that context, if you could also tell us what differentiates what goes on here in the us versus the european market? >> good question. i think a lot has been raised about compensation on wall street. i think one of the ways wall street firms will defend paying

people 10 million or 20 million or $30 million is that if we do not do it they will go somewhere else and do it. i think this is a circular thing that keeps going around. if firms decided to bring incentives back in line things would change. the way you do this is you have to tie compensation and incentives to the performance of your clients, and have to tie it to a long-run orientation where you take away the incentive the london whale had to swing for the fences because they wanted a big bonus in year one. you have to make compensation based on a five-year or 10-year record where clawbacks are very strict and are enacted. yesterday i am sure many people saw jamie dimon, ceo of j.p. morgan, his compensation was cut because of the london whale yesterday. people might say that is a great victory. i would say that to me it is

more of a band-aid, trying to show the public. there needs to be a more systemic change in incentives. the truth is that human nature and agreed it is something we as a people in my mind cannot regulate. if one had to fall some of the protests that took place around wall street, what i think is effective is to protest something very simple and factual, like bring derivatives onto exchanges. outlaw proprietary trading. do not give people the ability to swing for the fences. you take away the product they are using to do that. i think you try to tell people you need to make less money or we are going to your pay at x amount does not -- i do not think that jibes with american capitalism as i see it. people should be able to get rich and make lots of money. i just think they should be

required to do it in a transparent way that does not endanger other people. i think the easiest solution in my mind is to hold regulators accountable, hold politicians accountable, and take away the things that allow people to swing for the fences by regulating the markets. in terms of the question about europe versus the us, europe i would say is more like the wild west than the us. the last chapter nine book, when i moved to london i actually called the chapter the wild west because there is very much a greater sense of anything goes. i would say the us is a leader in a lot of these products, and the europeans follow. if the us can get these laws right, one reason congress doesn't want the passes he does it they do it here banks remove the euro. i guarantee that if the us changes something makes the

system more responsible they will be a sense of arbitrage around the world where everybody will try to get somewhere else, but ultimately the us is the strongest market in the world and i think others will follow if we do things here. >> in terms of your second point of the asymmetric nature of information and the casino analogy, when we talk about deposit creation like what is going on right now, the last month of last year there was $220 billion of deposit creation in the us system, it is working its way into fractional reserves and then the banks are obviously hedging as you pointed out, possibly not in a best interest. in terms of the deposit creation, the largest in history, who -- where is that money coming from, and in the casino analogy who is that person? >> i think deposit creation

comes from the fact that you look at retail investors and how much they have been investing in the stock market. since the flash crash in 2010 it has dropped significantly. i think there is a sense that people just want to put their money in a bank account and keep it safe to an extent. i think it is the fearfulness that come to invest in the market. do i believe that a big bank like citigroup or jpmorgan is using those funds recklessly? i do not think so. but are they proprietary trading? yes. that was the example of the london whale. i would hope that the system and the stock market become more transparent. investors do not feel the need to put their money into savings accounts but in vast. because that has helped the market grow.

>> you mentioned a number of banks that have behaved rather badly. what are the banks that have behaved well? that have been more profitable than the banks that paved badly? if not, you have a reversal. >> look at the canadian banks. just as an example. they did not have a unending leverage. they did not get the same complex products. they weathered the financial crisis just fine. i would say in the us, you look at banks like wells fargo that did not have a similar ratcheting up of risk and the fiduciary responsibility, look at the more boutique asset management places whose interests were not all over the place and did not have all sorts of conflicts. i think they survived a little

better. in retrospect i think banks like goldman sachs and morgan stanley and frankly jpmorgan were lucky to have survived the crisis. i think there was an effect occurring -- the government would step in and save. i think the people who weathered the crisis just fine were the ones who retained this fiduciary duty, where they were not betting against their clients, were not using client information to make themselves money. at the time they were less profitable but five years later i would argue they are a lot stronger and on less shaky ground. >> in the case of, was it because of any government regulation? >> it was. governments were not allowed to take 31 leverage. there were not allowed to proprietary trade in the same sense. well we as americans want maximum profit and maximum capitalization, the speed limit topic is relevant.

if you have smart curbs that do not allow you to make 50 times the amount of money but also do not allow you to lose times the amount of money, i think it is just smarter. >> i wanted to say, i applaud your courage. that was a great day to post on facebook your announcement and get feedback from friends and family. you talked about the ethical and legal dimensions of your decision-making process. this is your token seminarian question. was there a moral or religious dimension to that? >> you know, a theme that runs through the book -- i am jewish, and i do think that my upbringing has some effect on things. when i talk about the idea of a charity or philanthropy or university being charged hidden

fees, i do think there is a ethical element that ways on that that stems from one's religious upbringing. i do think it had some impact. i think it goes to this final line between ethics and legal, and there are too many people willing to make decisions that are technically legal but not necessarily immoral. one last question and we will wrap up. it collects basically a summation, in order to effect change you have to keep -- couldn't you boil down what you're talking about on a macro basis, repeal the repeal of the eagle and the derivatives, bring it back to where it was in the

clinton era because it seems to have worked for 70 + years? wouldn'to basis restrictions such as what has happened with morgan stanley where the traders could ,ompensated over five years wouldn't that create the disincentive to bet the house for next year's bonus? >> to keep it simple i completely agree with you. the two major bond regulatory thinks i am advocating for are a repeal for the two things that happened in the early 2000's that led to a lot of the problems, which is derivatives being really regulated -- being read-regulated. the bulk core role -- the volcker role. there are certainly people who stand for the full repeal of

glass eagle. i do think that some form of breaking up extremely large banks, allowing reckless trading activity, is not worthy. i think the thing about compensation and the firing over five years is essential. doesn't fix the problem completely? i do not think so. the truth is if you swing for not work and things do out and you can still leave and go to a hedge fund or go do something else. the law actually has to become a little bit stricter. i think greed and swinging for the fences always going to be around. it is impossible to stop. i think you actually need to change the root cause. if somebody gambles with a client's money that person potentially needs to go to jail or needs to have some

disincentives that if they are a reckless person there are two or three things they need to think about before they endanger the whole house. i think lots have to change in addition to compensation changing. laws but onesble that create curse that do not allow reckless activity. >> i guess your next talked to the law school. >> thank you very much everyone. [applause] eckerd terry -- today on c-span, former treasury secretary hank paulson. later, the future of ebay with john donahue.

>> in this high-tech digital age with high death television and high definition video, still all we get is static. that veil of mass truths -- of half-truths' obscured reality. we need media to give us this dictionary definition of static. we need the media covers power, not covers for power. we need a media that is the fourth estate, not for the state. and we need immediate that covers the movements that create static and make history. >> author, host, an executive producer of "democracy now," amy goodman taking your calls and tweets. >> former treasury secretary hank